First up, the term the started this mess REO.  It means, Real Estate Owned.  That simple.  Now how does that translate into the real world?  Real Estate Owned is actually a line item on a business’s balance sheet.  It is considered an asset.  Cisco has a line item for Real Estate Owned.  Pepsi has a line item for Real Estate Owned.  McDonald’s has a line item for Real Estate Owned.  The acronym has become a noun in today’s market, meaning the same thing as bank-owned.  When the balance sheet belongs to Citibank or Chase or Bank of America, the REO is bank-owned.  Cisco and Pepsi and McDonald’s do not market their REO properties as such, even though that’s what they are.  When those sorts of large corporations own real estate it is not “distressed”.  (Although a lot of property owned by a lot of large corporations today is upside-down)  When a property is respossessed by the lender and then placed back on the market, it needs to be disclosed that it is owned by a bank, or bank owned.  Pepsi and McDonald’s do not need to disclose in the marketing that they own the property, even though it shows up on that line item of their balance sheet.

When a bank sells one of their REO’s, (also called a bank owned property) they are exempt from a lot of the disclosures that a normal seller would be required to provide in the State of California.  The bank has probably never seen the property.  They don’t know if there is a leak in the roof.  They don’t know if the property previously had a termite infestation, or if water runs into the garage when it storms.  They don’t know if Uncle Fredo passed away in the third bedroom after a long illness.  I had one last week where the insurance company wanted to know the age of the roof.  That kind of information is not available in the sale of a bank owned property.  Two years ago I would have told you that those inspections were worth about $40,000 in the marketplace, depending on the value of the home and what area it was located.  Today, the market has adjusted and while I still believe them to be valuable, the market is no longer placing value on them.

It is essential that the buyer does their inspections on bank owned real estate.  It is also essential to have a competant inspector complete a home inspection on your property.  I’ve seen P-traps pulled out of the sinks, electrical yanked out by bitter former owners, disconnected appliances and everything in between.  Unless the buyer is a contractor, it is incumbant that they purchase a home inspection.  One of my buyer’s recently renegotiated with the bank after the inspections were completed for a $100,000 price reduction, and got it!  That’s the benefit of working with a Realtor experienced in bank owned property.

The next term is Short Sale.  Short Sales are not the same as a bank owned property, they are not REO’s either.  In a Short Sale the borrower is still in possession of the property.  That owner will provide the new buyer with full disclosure on the property.  The bank is being asked to take less than what is owned as satisfaction of the obligation.  In the last three years, banks have done a terrible job of handling these transactions.  Many real estate agents don’t understand how to handle them either.  In order to consider a Short Sale, the bank has a large package of information that they require, including all of the seller’s financials.  If the seller has access to funds, the bank will ask them to bring those in to escrow.  As an example, the seller is selling a piece of investment property and they are a businessperson with $250,000 in an investment portfolio.  They owe $750,000 on the property but in today’s marketplace they can only get $560,00 for it.  The bank is going to ask them to bring in the short fall.   Conversely, if it is a owner occupied property and the owner has lost their job and can no longer make the payments, the bank will review the seller’s financials, see that they are maxed out and make the Short Sale.

There are three different ways a Short Sale can come to market.  As a pipe dream, the package submitted or fully approved.  They don’t call it a pipe dream, but the listing agent has brought a property to the marketplace with no idea what the bank will accept as a settlement.  Sometimes the banks require an offer before they will look at the package.  These are the toughest ones to get to close.  A lot of the time these Short Sales are grossly underpriced just because the agent needs an offer to work with.  They don’t care if that offer closes or not, the bank won’t give them a pay off number without an offer.  I think this is a lousy practice on the part of the agent and the bank.  I just took over a property last week that had been priced at $500,000 on a Short Sale.  The offer had been accepted by the seller but the bank wanted $575,000 and the buyer wouldn’t come up the last $75,000.  In doing my research, the bank was right, the property was worth $575,000 and the agent grossly underpriced it, costing the owner the home and all the credit damage that goes with that.

I don’t believe there are deals in Short Sales.  The Short Sales I see show a lot of deferred maintenance.  Many times the sellers don’t bother to stage the home or even clean it up.  Some of the dumpiest homes I’ve seen have been Short Sales.  Things that were so bad that I would be embarrassed to put my sign on them if I weren’t advertising them as a fixer upper.  If the seller isn’t making payments during the Short Sale process, the possibility of it becoming foreclosed is always looming.  The default department does not stop the process because the seller is attempting to Short Sell the property.  I’ve seen many Short Sales crushed two weeks before close because the bank took the property back.  Short Sales are not for the weak of heart.

Hopefully this has helped demystify the difference between a bank owned property, an REO and a Short Sale.  Kind of makes you wish for the good old days eh?

Consider that the mortgage meltdown began in 2008.  The worst of it is already over.  Our market has stabilized and has been pretty stable for almost six months.  The meat of the meltdown only lasted about 20 months and this country managed to turn it around.  That’s not to say that there aren’t families still in trouble, there are.  Until the employment situation stabilizes there will still be families battling to keep their homes, but the worst is over.

I’ve thought in our marketplace that the $8000 doesn’t really matter much.  While it certainly matters in a $50,000 home in Pittsburg or on the outskirts of Antioch, it doesn’t matter much in a $600,000 home in San Ramon.   Basically if the purchaser can qualify for that home, they may very well  make too much money to qualify for the credit.  It helps in places where a home can be bought for $250,000, but if homes are being bid up by $10-20k, an $8000 credit becomes negligible.  It could be argued that the purchaser ended up with $8000 more in purchasing power, but even if the market pulls back that same $8000, in most Contra Costa marketplaces, it’s not much. 

At the end of the day, buyers may recoil slightly when the credit expires, but as I’ve always said “People have to live in houses”.  Unless that changes, the marketplace will always recover.

The other reason I like Broker’s Opens, besides it’s an easy way to see all the homes in the area in about ninety minutes, is the conversations I have with other professionals. Something that I noticed, and I always notice trends on the ground before everyone else, is that the phone quit ringing.  I call it “crickets”, because it’s so quiet all you can hear is the crickets singing.  I’m currently advertising seven properties, I have signs on another 11 properties and no one is calling.  I listened to the lenders talking and the interest rate is below 5 with a point right now.  That’s beautiful money.  So why is it so quiet?  I talked to several of my colleagues about it yesterday.  They all noticed it too and one of the prevailing theories was that people are scared.  We are living in scary financial times.

We’ve just watched businesses go under, many of us have lost our jobs and can’t get new jobs.  We’ve watched friends lose their homes.  We’ve watched families on the brink of ruin and marriages collapsing under the pressure.  It’s scary out there.  For the risk adverse home purchaser it’s very hard to get off the sidelines right now.  But it’s necessary, because the market is going to change again later this year.  The opportunities that exist right now will be gone forever.

I’ve talked before about how real estate is one of those industries that anyone thinks they can be an expert at, whether they’re in the industry or not.  Last week I fought a traffic ticket.  I haven’t been in traffic court to fight a ticket since 1989.  I got demolished.  Because I don’t do that every day.  It should have been a simple process, but I should have hired an attorney.  If you’re not living and breathing an industry every day, you’re going to get demolished going it alone.  Real estate is no different.

Yesterday one agent told me that he heard that the banks were going to release all the foreclosures in June.  Really?  No, he laughed.  Some soccer mom told him that while he was waiting to pick up his kids from soccer practice.  I work for one of the biggest REO brokers in the area.  We’ve been hearing that directly from the asset management companies since March of last year.  It’s just wishful thinking on the part of the asset management company.  They ain’t coming.

Why?  Because 2008 was essentially a run on the banks.  It sent this country to the brink of ruin. Banks failed under the weight of it.  They drove down prices by dumping into the market which made people walk away, driving the market down even further in a snowball effect.  The banks aren’t stupid.  They’re not going to do it to themselves again.  They will release these foreclosures, but in a measured fashion over a long period of time.  There are several factors that make this favorable to the banks.  One, tax treatment.  There have been changes in the rules that allow the banks to go back three years and take the whole loss off of their profits.  Win.  Two, some of these loans are government insured so they are made whole anyway.  Win.  And dumping them on to the market has been a PR nightmare.  I truly believe that the CEO’s of the banks saw what Obama did to the CEO of General Motors and don’t want to be next.  They like their salaries and bonuses.  If hanging on to these assets for an extra six months keeps them off of Obama’s radar, that’s a good thing to them.

How does that affect the local market?  We’re bottomed out.  We’ve been skipping along the bottom for a while now. I called the bottom back in April and I was pretty darned close in most local markets.  In spite of the gloom and doom reporting out there, we’re done.  It’s over.  Now is the time.  It’s not going to get any better than this.  The one thing that is going to change is if the interest rates pop up.  That will lessen affordability and box some people out of the market.  That’s why the time is now.  Are you ready?

Most properties are flying off the shelf in under 3 days now.  The only reason their days on the market is more than 3 is because the listing agent is leaving it open so more potential buyers have an opportunity to see it.  In other words, the property goes on last Tuesday.  The seller will review offers a week from Friday so the property remains on the market 10 days.  At the end of 1o days the listing agent is bringing the seller 15-20 offers to review.  The REO properties are staying on the market long enough for the Asset Manager to make a decision.  Usually 5-10 days again.  Some banks require that a property age on the market 3-5 days before they will review offers.  The offer deadline is 3-5 days from when it comes on the market, the rest of the days on market is just everyone standing around waiting for the bank to sign one of the offers.   As Realtors, if we’re not ready to show it right away and write right away, we’ll be watching that property sail into the sunset.  If our clients are on board with that tight timeline, the ship will sail without them.  The term I use is “Food fight”.  And it is.

I sent a client of mine to an open house in Oakland a couple of weeks ago.  He told me it was like waiting in line at a rock concert.  He estimated over 40 people at the open house.  I had previewed the house for him earlier that week and there was somebody there when I arrived and somebody waiting for the keys when I left.  I estimate that over 200 people saw that property.  We submitted, at 15 percent over asking which amounted to a little more than $51k.  We lost out to numerous offers that were more than 20% over asking.  And this is not a aberration, this is the norm for this market.  Think you can lowball a property in this market?  Think again. Oh, well that property must have been perfect.  No, actually it was in a good neighborhood and it was clean inside.  Not updated, just clean.  Termites, foundation, roof, fungus, 100 year old electrical, plumbing, faulty systems, the list went on and on for that property.  That’s the reality of this market.

If you want to play in this market, you have to be ready to strike.  And you have to want to sting like a bee.  You have to be agile, you have to float like a butterfly.  I ran into a couple and their agent at a property I was previewing last week.  We exchanged pleasantries on the stoop.  The wife told me she left work to come look at the property, she wasn’t taking a chance waiting.  That’s what people are doing out there in this market.  That’s the competition.

I did a BPO on a property up the road last week.  Within a one mile radius there were 22 homes for sale.  Of the 22, one was REO, 2 were regular sales and 19 were short sales.  What’s the message?  Banks aren’t taking them back as quickly and they aren’t dumping them on the market like they did last year.  They finally figured out that flooding the market was a self defeating proposal.  The problem is other agents aren’t conveying this information to their clients.  They’re doing exactly what they’ve always been doing, selling.  Wrong.

I met a guy yesterday who wanted to see one of our listings.  A very nice young man who hasn’t really settled on an agent, he’s just bouncing around.  Thirteen different agents have written on thirteen different properties for him.  He said to me, I just want to get a house and be done with this.  I told him I could get him the house, but did he want to over pay for the house?  He didn’t.  I explained the market to him and told him that I spend a lot of time knowing what real estate is worth.  If he was going to overpay with me, he was going to do it completely informed.  But I preferred he didn’t and was just patient with the process.  What?  So I don’t get a sale today.  Big deal.  Just because you can, doesn’t mean you should.  It’s about paying what makes sense for the client’s personal situation, the home and the neighborhood.  The fundamentals never change.  It’s about a client for life.  I don’t want to sell just this guy’s starter home, I want to sell him his move up home when he meets the right girl.  I want to sell him his next move up home when his family grows out of that one.  And if I’m still alive and in business, I’d sell him his downsized retirement house.  Along the way, I’ll help his friends out too, his brother, his Mom, the guy he works with, his sister in law and that’s all worth not making a sale today.  That’s all worth waiting for the house that makes the most sense for him.  That’s worth taking 15 minutes out of my day to teach him about the market.  Because the more my clients know, the better I look.

I’ve said this before, but it bears repeating. The real estate market is like San Francisco weather. If you don’t like the real estate market, just wait 10 minutes. By the time the news media catches up to what’s happening, it’s happened and we’re on to something else. If you saw it on the television, it’s yesterday’s news. That $200,000 screaming deal in Hayward? Gone. I sold several of them, but that deal isn’t there anymore. There’s a conga line out the door of those properties now and the price is being driven up. And they’re in terrible condition. What a lot of people didn’t understand was that $200k “deal” in Hayward was not move in condition. It generally came with a cracked foundation, subterranean termites, mold, missing appliances, a leaky roof and a roach and rat infestation. Furthermore, they aren’t selling for under asking any more. They aren’t even selling for asking. They’re getting bid up. That portion of the market is stabilizing. Last month a home that was very popular, fell out of escrow. It was my broker’s listing, so I knew it fell out before it hit the MLS again. I called a guy who was red hot for that property and said “Look, if you want it we have to write it now”. His response “How can you expect me to make a decision in a day about a transaction this large?” I told him it didn’t matter to me, if he didn’t want to make the decision in a day he didn’t have to, but he wasn’t going to get the house either. He didn’t get the house. He still doesn’t have a house and the neighborhood he was looking in has passed him by. I doubt he’s going to ever get into this market. The opportunities are on a train out of town right now while he stands motionless on the platform.

What I’m seeing is Hayward low end stabilizing. Concord’s low end is stabilizing too. Neither is rising, they’re just stabilizing. Oakland is a giant food fight. If you’re not willing to throw down, you’re just going to get roughed up in that market. In Oakland in particular, I’ve noticed that sellers and agents are pricing properties deliberately low in hopes of creating a frenzy and driving up the price. I think this practice is obnoxious. I’ve seen properties bid up $90k over asking in Oakland in the last three months. Those properties were improperly priced. Things aren’t what they appear to be in Oaktown.

The tide is turning on some of the selling practices too. Three months ago the bank/seller wouldn’t even consider replacing a stolen stove. Now we’re seeing them make the insurance claim and getting the appliance installed. I think the party is over on this one. Thousands of foreclosed owners sold thousands of appliances on craigslist. I think that it’s just a matter of time before the banks say “Enough” and start filing police reports. I have a house that the former owner vandalized on Monday night as they moved out. I’ll be picking up the police report on that one next week. I think some folks are going to be very surprised to have ruined credit and a criminal record. I had a friend ask me about that one a couple of weeks ago. Her husband was going to give parts of the house to his brother-in-law who was doing some remodeling of income property. She was worried and rightly so. I just asked her “do you want to be the person who did that?” She didn’t. I told her I was concerned that the banks were taking steps to end these practices behind the scene and that they were going to start pursuing and catching people in the act. The brother-in-law got his stuff on sale at Yardbirds.

There’s only one way to keep up with what’s actually happening in the market. Hire a realtor who’s working in the market. What you hear on the news and what somebody tells you at a cocktail party is interesting, but it might very well be yesterday’s news.

Now there was a guy you could trust.  I lost faith in the news around 20 years ago.  I was involved in a criminal case that was well reported.  The guy stole millions, we caught it, but the story was complicated.  I realized that the people who were reporting were just trying to get the story out and didn’t really care for the nuances of how it actually occurred.  I learned to take all media with a grain of salt.

In September 2005, I got on a plane and flew into Jackson, Mississippi.  I got the last hotel room in town, rented a car and the next day drove down to Gulfport, Mississippi.  There, the MGM Grand, which previously sat on a barge in Gulf, sat half a mile inland, aground.  I met a friend and we went down to Walmart and bought cheap jeans and waders.  That night we drove to Baton Rouge and the next morning we were at Lamarr Dixon awaiting our assignment.  I can say unequivocally, that the stories reported at the time and the reality on the ground were diametrically opposed to one another.  They just don’t take the time to learn the full story when they report it to us.

I take buyers out nearly every day of the week.  They tell me that it isn’t a good time to buy or it isn’t a good time to sell or other broad stroke generalizations about the housing market.  There is no such thing as a bad time to buy or sell for everyone.  There may be a bad or good time for YOU to buy or sell.  Your neighbor’s situation might be entirely different.  Mathematically, it’s a great time to look at purchasing for folks that couldn’t get into the pricey market before and for investors in particular.  I like move ups too.  You get less for your current place but you pay less for the next place and taxes are based on the lower number.  I like it.  Mortgage rates are very pretty right now.  It’s a great time, unless you’re in an industry that’s spotty and you’re concerned about losing your job.  Then it’s not a great time for you, it’s a scary time for you.  Most importantly, don’t let something you saw on the 5 o’clock news dictate how you invest your money, and where you choose to live.  Check things out for yourself.  There’s a lot going on right now.  Talk to those of us who are on the ground doing the work right now.  We know what’s going on out there and we’d be pleased to share the information..

Jon Stewart laid out the media’s shortcomings last week.  Here’s your moment of zen.  Enjoy.

httpv://www.youtube.com/watch?v=cTAk54c8tFQ

The market is currently bloated with bank owned properties.  Owners who aren’t upside down are grousing about these sales.  The truth is, these properties don’t reflect the real market.  They reflect what could be expected from the market in a fire sale.  They reflect what you could expect if you were forced to sell by a divorce or job loss.  Only worse.  Bank owned sales, REO transactions do not give typical disclosures, and they don’t have to.  Some value is lost there; I would consider it to be between $20-40k.  I have people ask me questions all the time about the properties we have for sale.  Some I know the answers to and some I don’t.  I endeavor to ask the neighbors about the property.  I had one guy tell me that the previous owner had some electrical work done.  Later a client asked me about the electrical.  I could tell him was that I had heard that some electrical had been done but in this particular case, I couldn’t see what they’d done and I told the client that.  I then recommend he get an inspection.  When a property is in owner possession and that question is asked, the owner has to answer truthfully.  Additionally they have to disclose all the conditions they know of at the property.  The day my last home was foreclosed on was a very happy day for me.  All previous potential liability on that property to me was gone.  I believe I disclosed everything about that house, but truth be told, they could have found some little thing that slipped my mind and sued me.  With the foreclosure, that ship just sailed.  As an agents, we don’t have to crawl under the house to see if there are leaks.  We suggest to potential buyers that they get a termite and home inspection.  Bank owned properties are definitely buyer beware.

People who are successful in this market are people who see something that no one else sees.  If you can walk into a home and see the potential, you’re going to get a good deal, but you also have to not be afraid.  You can’t be afraid of termites or vandalism or half remodeled houses.  You have to be able to look at it and see what it could be.  You have to be able to guestimate the work.  This market is not the sort of market where you fall in love with a property.  Some get 30 offers, others get one.  You have to know your number and stick with it.  You have to see what no one else sees about that property and then move decisively.

I was talking to an older agent at an open house yesterday. One of the comments she made to me was how the market was such an ever changing beast and at her age it was hard to keep up. Quite honestly, she was probably five years older than I. I felt sad for her because to me, keeping ahead of the market is the best part of the job. I love figuring out where the market is going and having my clients in line with that movement. And the market has changed again.

I’ve had several people call me recently thinking they can get a home for $200k in Hayward in a good neighborhood. You can, if you have a hammer and a paint brush and maybe a license to apply termite solutions. The entire structure, if sound, will need repainting and flooring and probably some other serious work. In other words, that ship has sailed. I have people call me who think they can lowball a bank owned home. Here’s the reality of the situation: Good bank owned properties are receiving in excess of 10 offers each. I’ve been handling a property that I think is a complete dog. It had 11 offers exceeding $50k over asking. I am amazed by that. Brokers ask for highest and best, and then the top offers go to the bank. Some banks do look at them all, but some only look at the top three, top five or some other random number. Agents that write these low ball offers are spinning their wheels and wasting their client’s time.

Right now, this market feels to me like a boxing match. Float like a butterfly, sting like a bee. You had better be ready to move your feet if you’re going to play. It’s important to know the market and move quickly when you see what you want.

The first order of business is to get your preapproval in order. The second order of business is to have your check book with you at all times. The third order of business is to be ready to prove that you have the funds. Then don’t be afraid to pull the trigger if you see something you like. There are great deals out there, it’s time to get into the game.

A couple of days ago I talked about why a real estate professional is more important now than ever. I’m a big fan of the website “It’s Lovely, I’ll Take It!“. She gets bad MLS pictures from all over the country. There are a lot of not great “professionals” out there. If, as a professional, you can’t make the home look attractive to a potential purchaser, you really need to rethink your vocation. But there are things that a professional will see that an owner won’t even notice that will put the owner in the position of leaving money on the table.

First, they didn’t get the picture level. This cheapens the property in the eye of a potential purchaser. (Actually, it’s so off kilter it makes my website appear lopsided) Then the photographs of THEIR children are front and center. A potential purchaser can’t visualize their children in a home when they’re busy looking at your children. The television is left on. Is that a tupperware container full of bon bons on the end table? No, no and no. While we love to goof on the internet, this FSBO is leaving a lot on the table. They highlight the Berber carpet in the ad. Nice you think, but then you see the picture of the four kids and you just imagine what the Berber looks like. They even say “Willing to Negotiate” in the ad. Translation “Desperate”. They’re going to become more and more desperate as the market moves against them and no one looks at this home because they can’t see themselves living in it. The home itself is lovely, the pictures they posted make it difficult for the untrained eye to see. Their “Willing to Negotiate” tag line will get all the sharks circling. Not a great position to be in. I doubt this couple saved any money by not going with a professional.